When the history is written, I suspect the brutal budget battle transfixing the nation will be
seen as much more than a spectacular partisan showdown. Careful historians will, I think, cast it
as a symbolic turning point for post-World War II institutions — mainly the welfare state and the
consumer-credit complex — that depended on strong economic growth that has now, sadly, gone
missing. The story behind the story is that prolonged slow growth threatens historic changes to our
political and social order.

Economic growth is a wondrous potion. It encourages lending, because borrowers can repay from
rising incomes. It supports bigger government, because a growing economy expands the tax base and
makes modest deficits bearable. Despite recessions, it buoys public optimism, because people are
getting ahead. The presumption of strong economic growth supported the spirit and organizational
structures of postwar America.

Everyday life was transformed. Credit cards, home-equity loans, 30-year mortgages, student loans
and long-term auto loans (more than 2 years) became common. In 1955, household debt was 49 percent
of Americans’ disposable income; by 2007, it was 137 percent. Government moved from the
military-industrial complex to the welfare state. In 1955, defense spending was 62 percent of
federal outlays, and spending on “human resources” (the welfare state) was 22 percent. By 2012, the
figures were reversed; welfare was 66 percent, defense 19 percent. Medicare, Medicaid, food stamps,
Pell grants and Social Security’s disability program are all postwar creations.

Slow economic growth now imperils this postwar order. Credit standards have tightened, and more
Americans are leery of borrowing. Government spending — boosted by an aging population eligible for
Social Security and Medicare — has outrun our willingness to be taxed. The mismatch is the basic
cause of “structural” budget deficits and, by extension, today’s strife over the debt ceiling and
the government “shutdown.”

The temptation is to think that stronger economic growth ultimately will rescue us and make
choices easier. This is economic growth’s appeal. It provides the extra income to buy more of what
we want. We explain the weak economy as the hangover from the financial crisis and the Great
Recession. Their legacy of caution and pessimism will, with time, dissipate. The economy will
strengthen. This is plausible.

But it’s equally plausible that slow growth will persist. We rebel at the notion. As economist
Stephen D. King writes in his book
When the Money Runs Out — The End of Western Affluence:

“Our societies are not geared for a world of very low growth. Our attachment to the
Enlightenment idea of ongoing progress — a reflection of persistent postwar economic success — has
left us with little knowledge or understanding of worlds in which rising prosperity is no longer
guaranteed.”

His glum outlook is more than idle speculation. In a recent column, I noted that annual U.S.
economic growth has averaged slightly more than 3 percent since 1950, but predictions of future
growth cluster around 2 percent. Significantly, the forecast slowdown reflects factors that are
only weakly related, if at all, to the recession, as Cato Institute economist Brink Lindsey shows
in a new study.

Lindsey attributes U.S. economic growth to four factors: (a) greater labor-force participation,
mainly by women; (b) better-educated workers, as reflected in increased high-school and college
graduation rates; (c) more invested “capital” per worker (that’s machines and computers); and (d)
technological and organizational innovation. The trouble, he writes, is that “all growth components
have fallen off simultaneously.”

Slow growth is more than scare talk. When adjusted for population increases, it reduces per
capita income gains to 1 percent to 1.5 percent annually, Lindsey calculates. That’s half to
three-quarters the historical rate. The amount is small enough to be skimmed off by rising taxes,
higher health-insurance premiums or growing inequality. For many households, it would mean
stagnation or worse.

What looms is a more contentious future. Economic growth serves as social glue that neutralizes
other differences. Without it, economic and political competition becomes a game of musical chairs,
where “one person’s gain is another’s loss,” King writes. There’s a “breakdown of trust,” as
expectations are disappointed. It’s an often-ugly process that is convincingly confirmed by
Washington’s current political firestorm.